Optimality and Sustainability: Regulation and Intermodal Competition in Telecommunications

Michael A. Einhorn

RAND Journal of Economics, 1987, vol. 18, issue 4, 550-563

Abstract: As regulators continue to open utility markets to entry, new market contestants may specialize in providing service for the utility's largest customers. Consequently, old utility pricing procedures may no longer be sustainable. Taking telecommunications regulation as an example, this article develops optimal pricing strategies for utilities that have large customers who have other attractive service options. I demonstrate that under an optimal nonuniform price schedule, utilities can legitimately price high-level usage below its associated marginal usage cost. Furthermore, customers will make economically efficient choices when deciding whether to forego utility service.

Date: 1987
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